Opinion
No. 70-354 WK
October 6, 1978
Chapter X Reorganization — Proof of Claim — Long-Term Debt — Acceleration
The filing of a Chapter X petition, the debtor's strained financial condition, and the default or non-payment of its longterm debts will usually cause the longterm debts to accelerate and thus become provable short term debts. However, circumstances may exist in which the debtor's long-term debts will not be accelerated in a Chapter X reorganization.
After approval of the Chapter X petition, creditors were notified to file their proofs of claim. The state of Alabama filed a proof of claim based upon a foreign corporation franchise tax. Under Alabama law, total capital is taken on the liability side of the balance sheet and includes, by statute, long-term debts. As defined by the state of Alabama, long-term debts are those debts maturing and payable more than one year from the date the tax liability arose. The trustee objected to the proof of claim filed by the Alabama revenue department on the basis that the tax assessment was too large because the department's calculation of long-term debt was erroneous. The essence of the trustee's objection to the tax assessment was that many of the obligations which may have been long-term debts were accelerated in 1970 and thus became immediately due and payable. The trustee asserted that many of these debts lost their characterization as long-term debts and thus became short-term debts due and payable in less than a year.
The court noted that the issues would be resolved consistent with Alabama law. Under Alabama law, there is a good faith limitation on acceleration clauses. Here, noted the court, there could be no assertion that the parties accelerating payment on the various notes did not do so in good faith believing that the prospect of payment had been impaired. Thus, the court stated that the holders of notes that contained specific acceleration or default clauses could legally accelerate the debt and demand full payment causing the debt to become a short-term obligation.
Alabama also recognized the doctrine of anticipatory breach. This doctrine was a sufficient basis to allow the holders of long-term notes which do not contain any specific default or acceleration clauses to treat either the filing of a Chapter X petition and/or the non-payment of their notes as a default that entitles them to demand payment for the full amount of their claims. Thus, the holders of these instruments may accelerate the long-term obligations, which has the effect of changing their status to short-term debts.
In a Chapter X proceeding, distribution is made to creditors after the approval of a plan of reorganization. Thus, the original term of a note has no bearing in a bankruptcy proceeding. The time of payment is dependent upon the length of time necessary to complete a plan of reorganization. Thus, usually upon the filing of a Chapter X bankruptcy petition and the filing of claims, a long-term debt as defined by Alabama law will not exist.
Although there are various reasons why pre-bankruptcy long-term debts may become short-term debts and usually a long-term debt is accelerated in a Chapter X bankruptcy proceeding, circumstances may sometimes exist that cause a pre-bankruptcy long-term debt to retain its status as a long-term debt despite the filing of a Chapter X petition. In the instant case, there were approximately 42 items of debt asserted to be long-term. After careful consideration, the court determined that five of these items should be treated as long-term liabilities. See Sec. 224(2) [§ 1142] at ¶ 12,205.